The long-standing tax exemption on endowment investment income was an acknowledgement of the public good provided by these resources – for example, nearly half of higher education endowment spending funds financial aid. But the tides have turned. In 2017, the Tax Cuts and Jobs Act (TCJA) implemented a 1.4 percent tax on net investment income3 for the narrow subset of private colleges and universities with assets over $500 thousanbd per student, which, as of 2023, applied to 56 institutions.
The latest proposal released by House Republicans would represent a regime change and a dramatic departure from the current financial model of higher education institutions. The proposed tax rates would increase the TCJA rate by up to 15-fold, with the brackets spanning the current 1.4 percent of net investment income for private institutions with $500 thousand - $750 thousand in endowed assets per student, 7 percent for those with funds between $750 thousand - $1.25 million per student, 14 percent for those with funds between $1.25 million -$2 million per student, and up to 21 percent for those with $2 million or more in endowed assets per student.2 The chart below presents the most recent data from the 2024 NACUBO-Commonfund Study of Endowments, illustrating the number of institutions that would be categorized within each proposed tier.
Among other changes to the charitable sector, the House bill proposes an increase in the tax on net investment income for certain private foundations. The tiers proposed are as follows:
As our partners at the Council on Foundations aptly summarized: “Increasing taxes on private foundations means fewer dollars to charitable organizations, from food pantries to disaster relief groups.” You can find their analysis and list of related resources here.
Boards and investment committees will need to conduct a thorough assessment of their investment policies and strategies, including asset allocation, rebalancing, and spending, as well as various liquidity scenarios. For those facing immediate tax and budget implications, difficult decisions will likely have to be made – institutions impacted by funding cuts this year have already seen sweeping changes, from mass layoffs and program cuts to major portfolio shifts to bolster liquidity. Beyond tax changes, strategic governance and leadership frameworks (such as Commonfund’s Crisis Playbook) can help institutions navigate the breadth of shifts and challenges facing these segments.
Commonfund Institute will continue to monitor these developments and provide resources to you and your institution. To receive these updates, please subscribe to our Insights blog.
To learn more about developing a crisis framework and the most important investment decisions facing nonprofit institutional investors, register to join us for the upcoming Investment Stewardship Academy, a 3-day intensive training for fiduciaries being held at Yale University from June 8-11th.